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Why U.S. Businesses Should Be VAT Aware

For
many U.S. businesses (and European ones, for that matter),
the European value-added tax (VAT) system is an extremely
complex regime to master and bears little resemblance to
the sales tax system to which they are accustomed. It is
often the case that U.S. businesses making supplies of
goods or services in Europe inadvertently fall into the
“VAT net” and do not realize that they have an obligation
to register and charge local VAT. Interest and penalties
may therefore become payable as a result, and
simplification regimes requiring a good track record are
not available. But it is not compliance concerns that most
often trigger a look at European VAT by U.S. businesses;
it is mostly the realization that not considering VAT has
become an expensive cost of doing business in Europe.

The aim of this item is to highlight awareness of the
aspects of the VAT system that apply directly to overseas
businesses so that they can seek professional advice at
the correct time, thereby avoiding noncompliance and
unexpected costs. This item also looks at changes in the
rules regarding place of supply of services that will
affect U.S. businesses starting in 2010.

Place of
Supply: Services

A fundamental principle of the
VAT system is that VAT is due in the territory where the
supply is deemed to take place. Where services are
concerned, many U.S. businesses will not have to worry, as
services provided to a European customer will either
be:

Deemed to be taxable where the supplier
is based (i.e., the United States), in which case no VAT
is due; or

Reverse chargeable in the
member of the European Union (European member state)
where the customer is based. This means that it is the
customer who is obliged to account for the VAT due and
not the U.S. supplier. Examples of such services are
consultancy, assignment of licenses and trademarks, and
advertising.

However, some services are
deemed to be subject to VAT where those services are
physically carried out. The most common of these are:

Supplies of land-related services;

Services relating to exhibitions, conferences, or
meetings and any services ancillary to (including
organizing) these services; and

Supplies
of goods with installation services.

Of
these services, U.S. businesses are most likely to supply
goods with installation to European Union (EU) customers,
and it is this scenario that can lead to an unexpected VAT
cost.

Supply of Goods with Installation

Whereas a U.S. business exporting goods to the European
Community (EC) will have no VAT liability (unless it acts
as importer of the goods into the United Kingdom (for
example) for onward supply), if the business also arranges
for installation of those goods, a VAT issue arises. This
is because if goods are installed or assembled at a place
in the EC, the place of supply for VAT purposes is the
European member state of installation. This means that a
U.S. business could have a liability to register and
charge VAT in that European member state.

Fortunately, some European member states offer a
simplification procedure whereby the customer may account
for any VAT due. For example, the current position in the
United Kingdom is that, by concession, there will be no
requirement for a U.S. business to register for VAT in the
United Kingdom if the following conditions are met:

The supply is a one-off and no further U.K.
business is anticipated;

The goods are
imported from outside the EU; and

The
customer acts as importer and shows the full value of
the goods—including installation and assembly costs—on
the import entry.

The precise rules and
procedures differ across the European member states, and
it is essential that U.S. businesses seek advice in
advance of carrying out any supply with installation in a
European member state.

Representative Offices and
Branches

A U.S. business may have a presence in a
European member state in the form of a branch,
representative office, or registered office. If the office
has both the technical and human resources necessary for
providing and receiving services, the local tax
authorities may treat the U.S. business as having a “fixed
establishment” in that European member state. The question
then is, what service is that fixed establishment
providing?

If the function of the office/branch is to
provide marketing services to the U.S. head office, this
should be disregarded for VAT purposes because it is a
“supply” within the same legal entity. However, if the
fixed establishment has the necessary human and technical
resources and it supplies services to third-party
customers, the U.S. business may have an obligation to
register and account for VAT in the European member state
of establishment. It is essential that a proper analysis
of the supplies being made by the office or branch is
carried out, and VAT advice sought, to determine whether
there is a liability to register for VAT in any member
state. The same also applies if the U.S. head office
intends to set up a subsidiary company in one or more
member states.

VAT Package

In February
2008, a package of VAT measures (Directive 2008/8/EC) was
agreed on by the European Council (the highest political
body of the EU). The measures contain fundamental changes
to the VAT system, which will be as significant for U.S.
businesses doing business in Europe as they are for
EU-based businesses.

For a U.S. business with one
or more places in the European Union from which it makes
supplies, a key change starting January 1, 2010, will be
that it will no longer be required to charge VAT on
supplies to other VAT-registered businesses in other
European member states. Instead, the customer should
account for the VAT due in the European member state in
which it belongs under the reverse-charge procedure.

For business-to-consumer supplies of services, the
general rule for the place of taxation will continue to be
where the supplier is established, subject to some
exceptions. Furthermore, the VAT package contains “special
schemes” that may be used by U.S. suppliers both with and
without a business journal in the EU. These special
schemes are applicable to supplies of telecommunications,
broadcasting, and electronically supplied services, all of
which are covered below.

Electronic Services

There is no binding definition of an electronically
supplied service, but agreement has been reached among
European member states that the essential characteristics
are as follows:

The service is delivered
over the internet or an electronic network in the first
instance; and

The nature of the service is
heavily dependent on information technology (e.g., the
service is essentially automated and requires minimal
human input).

Examples of electronic
services include website supply, website hosting, distance
maintenance of programs and equipment, software, and
making databases available (Directive 2002/38/EC). The
place of supply of these services is normally the country
where the customer belongs, subject, in certain
circumstances, to where the services are effectively used
and enjoyed. Consequently, if a U.S. supplier has
nonbusiness customers in multiple European member states,
it would have an obligation to register and charge VAT in
each of those European member states if the value of
services provided is above the VAT registration threshold
in the applicable European member state.

Fortunately, a special scheme is in place for non-EU
suppliers of electronic services, which avoids the need to
operate multiple VAT registrations. This “one-stop shop”
system can currently be used only by U.S. businesses that
do not have a fixed establishment in an EC country from
which it makes supplies of goods or services (this will
change starting January 1, 2015).

Telecommunications or Broadcasting

Currently,
if telecommunication or broadcasting services are
provided, no special scheme akin to a one-stop shop exists
for non-EC suppliers. This means that the U.S. supplier
must register in every European member state where it has
nonbusiness customers once it exceeds the relevant
VAT-registration threshold.

Recovery of European
VAT

Finally, a word about VAT incurred in Europe:
Although the current one-stop shop for electronic services
and the schemes set to take effect in 2015 are extremely
useful in minimizing compliance obligations for a U.S.
supplier, the schemes do not permit recovery of VAT
incurred on purchases used in making supplies. Instead, a
U.S. business must rely on the rules contained within the
Thirteenth VAT Directive (Directive 86/560/EC) to recover
this VAT. This means that individual claims, within strict
deadlines, must be submitted to each European member state
in which VAT was incurred. This procedure can be complex
and often includes protracted negotiations with the
European member states concerned.

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